Summary
'Elasticity of Demand' measures the responsiveness of quantity demanded to a change in one of its determinants. The most common type is Price Elasticity of Demand (Ed), which measures how demand responds to a price change. It can be elastic (responsive, Ed > 1), inelastic (unresponsive, Ed < 1), or unitary (proportionally responsive, Ed = 1). Two extreme cases are perfectly elastic (Ed = ∞) and perfectly inelastic (Ed = 0). Other types include Income Elasticity (responsiveness to income change) and Cross Elasticity (responsiveness to a change in the price of another good). This concept is vital for businesses in setting prices and for governments in levying taxes.
Must Know Points
- Elasticity of Demand measures the responsiveness of demand.
- Price Elasticity (Ed) = % Change in Quantity Demanded / % Change in Price.
- Ed > 1: Elastic (luxury goods).
- Ed < 1: Inelastic (necessities).
- Ed = 1: Unitary Elastic.
- Income Elasticity is positive for normal goods and negative for inferior goods.
- Cross Elasticity is positive for substitutes and negative for complements.
- The Total Outlay method is used to measure price elasticity by observing total expenditure.